The focus of this report is on small franchise businesses and independent non-franchise businesses created in 1986 and 1987. The study tracks and compares the survival patterns of the two groups through late 1991.

Scope and Methodology

The major data source used in this study was the U.S. Bureau of the Census' Characteristics of Business Owners (CBO) compiled in 1992. The CBO is a sample of 125,000 generally non-corporate small firms, weighted to be overly representative of minority- and women-owned firms. To be included in the CBO survey, firms had to have earned at least $500 in 1987 and filed a tax return. Of the 125,000 firms surveyed, 82,202 were franchise firms--about 3 percent of the firms covered in the 1987 CBO survey. (For purposes of this research effort, only firms that grossed at least $5,000 in revenue in 1987 are studied.)

While the CBO provided excellent coverage of very small firms, it was not necessarily representative of the franchise population. A major weakness of the CBO is that it does not include corporate franchises or corporate independent firms. To supplement the CBO data, the Business Census of Retail Trade and the Business Census of Service Industries were used. These data sources offer fairly comprehensive information describing establishments for two major industry groups: restaurants, and hotels and motels. Also, unlike the franchises in the CBO data, most of the franchises in the business censuses were more likely to be organized as corporations and be part of multi-establishment enterprises.

In analyzing franchise survival, the CBO portion of the study examined both firm and owner traits, especially for non-corporate franchisees. Additional firm traits studied were initial capitalization, business industry, number of employees, and 1987 mean sales and net income. The owner traits that were studied included educational attainment, management experience, and gender. In addition, it was possible to know whether the business had a previous owner.

Highlights

Analysis of the CBO data for the period studied (1987 - 1991) revealed that generally young independent small firms had a better chance of surviving than small, non-corporate franchises.

While franchise firms were better capitalized than non-franchise firms, about 62 percent of the franchise firms survived, versus 68 percent of the non-franchise or independent firms.

Average profit was much higher for the independent businesses; profits were negative, on average, for the franchise firms.

Even when the data were limited to the retail sector, non-corporate franchise firms had lower survival and profit rates than independent firms.

Corporate franchises in the restaurant and hotel industries had significantly higher survival rates than independent corporate firms. (Because the exact size of the corporate parents could not be identified in the Census data, it is unclear what percentage of the establishments represent actual small businesses.)

Corporate franchised establishments performed much better than their non-corporate counterparts. They were generally more heavily capitalized and their survival rates were higher than those of non-corporate franchises in the hotel and restaurant industry. The data suggest that affiliation with a corporate parent increases the chance of survival and may be related to higher profitability.

Franchises purchased from a previous owner were riskier than franchise firms started from scratch.

Only 49 percent of the franchises started by women in 1987 were in existence in 1991, compared with 67 percent of the independent firms started by women.

Relative to all franchises, the franchises owned by women were less well-capitalized and more likely to be in the service sector. Small, women-owned non-corporate franchises had lower survival rates than non-corporate franchises owned by men. (It is possible that women business owners spent less time in their businesses than men business owners, but this could not be determined because of limitations of the CBO data.)

Among minority franchise groups, Asian immigrants were dominant among the highly capitalized startups, with owners who were more likely to be college graduates. (Small sample sizes in the data prevented separate analyses for each minority franchise group.)

Summary

The study challenged the presumption that the franchise form of business ownership offers a better chance at success than does an independent startup.

While the dataset used for this analysis was not without limitations, the results, tested in a variety of different contexts, remained consistent: opening a new, non-corporate independent small business provided a better chance of success than starting or buying a non-corporate franchise. Corporate franchised establishments performed much better; they were generally more heavily capitalized; their survival rates were higher than those of corporate independents.

Despite some strengths of young non-corporate franchise firms, they were dramatically less profitable than young independent small firms of the same age, and they exhibited a lower survival rate -- 61.9 percent compared with 68.1 percent for non-franchised firms -- over the time period studied.

Related Studies

As recommended by the 1995 White House Conference on Small Business, several other studies on franchising will be completed for the Office of Advocacy during the next several months. Contact Advocacy's Office of Economic Research at (202) 205-6530 for further information.

See also, "Differences Between Successful and Unsuccessful Franchisors," (Scott Shane, Georgia Institute of Technology, 1995), and "Franchising's Growing Role in the U.S. Economy, 1975-2000," James Trutko, John Trutko, and Andrew Kostecka for James Bell Associates, Inc., 1993).

Ordering Information

Reports are available for purchase from:
National Technical Information Service (NTIS)
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(703) 487-4650; (703)487-4639 (TDD)